A Close Look at SandRidge's Results in the Mississippian

When Sandridge (SD) talks about its Mississippian acreage, it makes it sounds like there's no "sweet spot" in the formation which implies that each of its counties is as good as the next. There's an advantage for SD to speak of its acreage like that, because with 1.85 million acres scattered across the Mississippian, the company is banking its future on the play (assuming it follows through with its plan to sell its Permian Basin assets). Based on 160-acre spacing, SD estimates it has 11,000 net well locations of which it will have drilled a program total of 589 wells by year-end with 581 planned for 2013. As shown by the graph below, the company’s early results in the Mississippian have me skeptical that all of its 11,000 well locations will be prospective for drilling at current commodity price levels.

SandRidge's 30-Day Oil Production Rates in the Mississippian by County

1The Oklahoma Corporation Commission (OCC) doesn't provide natural gas production for wells designated as "oil wells". Oil cut based on initial production rates provided by the company in completion reports.

Note: 30-day production rates may differ from reported figures as the state doesn't report the amount of days a well produced in a month. For this reason, production may be understated.

In Oklahoma, Alfalfa and Grant are its top producing counties although it has drilled a couple dozen wells in Eastern Woods County. While production from Alfalfa looks to be much stronger than Grant, I don't see much difference between these counties and expect them to perform similarly moving forward. Alfalfa's advantage over Grant can be attributed to two monster wells drilled by SD in the county, Puffinbarger 1-28H and 2-28H, both of which achieved 30-day production rates of more than 1,800 barrels of oil per day (BOPD). The Woods County wells are gassier and less impressive overall, so I wouldn't expect the company to do much there other than drill to hold.

In Kansas, results have been strong in Harper and Barber which are located across the border from the aforementioned Alfalfa and Grant Counties. Production from Comanche, which is North of Woods, has been similar to Woods, thus less impressive than Harper and Barber. All of this evidence leads me to believe that Woods and Comanche will be less economic than the counties to the east. To that end, expect SandRidge to delineate its acreage in Sumner and Cowley (North of Grant and Kay Counties, Oklahoma) over the near-term.

A lot of people are wondering why SD's impressive production numbers aren't translating into bigger production "beats" with coinciding stock price appreciation. One answer is steeper than expected declines in the Mississippian:

The above wells are average to above average performing wells across SD's acreage. The company has to be disappointed by its Puffinbarger 1-28H well which has declined at a high rate since its impressive 120-day run when it produced at an average of 1,110 BOPD. Despite recovering more than 150 MBO during its first six-months, the well has since fallen off the map and produced at a rate below 100 BOPD during September, 2012. This is a disappointing result and one that undoubtedly contributed to the company's decision to lower estimated ultimate recoveries (EUR) of oil to 155 MBO per Miss well.

Of the rest of these "average to above average performers", 5 of 11 are producing at a rate below 100 BOPD as of August, 2012. Does this mean SD was wrong when it claimed a 119% rate-of-return (ROR) for its Mississippian program earlier this year? Yes it does and I would argue this has as much to do with its recent stock price struggles as anything else. The company's expectations came back down to earth in its Q3 2012 conference call when it adjusted its ROR target to 50% (still robust) on its Miss drilling program.

So what changed? The 30-day average IP of 181 BOPD that I computed (see graph above) on the 138 wells I looked at implies a rate of 324 BOEPD (56% oil/see footnote below). This is very similar to the company's reported program production rate. Instead, steeper than expected declines in oil production combined with the realization that its acreage produces a lot of gas has caused the company to modify its expectations. SD now expects its oil EURs to be 40% of total production (down from 45%) which is more in-line with what Range (RRC) has predicted. Economically, I expect these wells to pay for themselves in approximately 2.5 years, longer than what you'll find in the Bakken or Eagle Ford but still plenty economic.

I don't see SandRidge having trouble achieving its (new) target Miss EUR of 155 MBO and 1.6 Bcf (422 BOE) per well in its core acreage, but I'm skeptical of its assumption that economics will be similar in the extension. Investor skepticism over this claim is probably another reason for recent stock price struggles. To that end, the company would be wise to hang on to the Permian until it proves its theory on the extension Miss.

Note: The Oklahoma Corporation Commission (OCC) doesn't provide natural gas production for wells designated as "oil wells", so I inferred the total production rate based on initial production rates provided by the company in the completion report.